Fonterra pulls contaminated cream from shelves

Fonterra has recalled almost 9,000 bottles of cream distributed to retail and food outlets in the top half of the North Island.
Photo: Bloomberg

by
Tim Binsted

Fonterra is back in damage control mode with its second food safety scare in six months after tests indicated some of the New Zealand dairy giant’s fresh cream products may be contaminated with E. Coli bacteria.

The company recalled almost 9000 bottles of fresh cream from retail and foodservice outlets in New Zealand’s north island where the problem batch is confined. But damage to the world’s biggest dairy exporter’s image could extend beyond New Zealand.

Fonterra Brands NZ
managing director Peter McClure told Fairfax Media that he became aware of the problem at 10am on Monday and he had spoken with his chief executive, Theo Spierings, by Monday night.

“No one wants this for their brand and the timing isn’t great, but it’s the way we act because of what’s occurred that is probably more important. Consumers can be reassured because of a long history of quality product and the fact that we’ve moved quickly with the recall," he said.

Having listed in Australia and New Zealand in November 2012, Fonterra has had a rocky start to public life.

Since listing, the company has endured two food safety scandals, diminished milk intake from New Zealand’s worst drought in more than 20 years, severe earnings volatility from extreme market conditions, and legal action from Danone in the wake of the 2013 food safety scare.

Mr McClure said the 8500-odd bottles of cream that have been recalled in the latest incident represented about 350 crates, and Fonterra produces around 22,000 crates of fresh cream every day. “It’s a small part of one day’s production. Production before and after this has been cleared so it is an isolated incident," he said.

“In almost two decades of working here we’ve never had an E. Coli problem. There are 100 voluntary food recalls from food companies in NZ every month, they are very common. But I don’t want to belittle this or take away from the seriousness of the issue."

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Not sure of liabilities

The E. Coli bacteria can cause vomiting and diarrhoea and at least three people have indicated they are suffering some symptoms. Mr McClure said he is not sure what Fonterra’s liabilities are in the case of legal action.

Fonterra was embroiled in a global crisis last year when tests detected potentially fatal botulism-causing bacteria in a batch of whey protein concentrate, which is used in sports drinks and infant formulas among other things.

The positive test ended up being a false alarm, but the scandal saw Fonterra temporarily locked out of several markets including China, Russia, and Sri Lanka. The scare is believed to have cost Fonterra’s New Zealand milk products boss
Gary Romano
his job.

The botulism crisis prompted a large-scale recall of infant formula products by companies supplied by Fonterra, and in the wake of last year’s recall, French food behemoth Danone has cancelled its supply contract with Fonterra and is launching legal action against the company.

Danone said on January 9 that it had identified an initial €300 million ($NZ490 million) in anticipated business losses for the 2013 financial year.

Danone spokeswoman Eliza Newton told Fairfax Media that Danone had experienced “a significant drop off" in public trust for its brand following the botulism scandal. Ms Newton said the final compensation figure would be determined at the trial.

Fonterra said that it would “vigorously defend" the legal proceedings. According to its 2013 financial report the Auckland-based dairy giant, which is also Australia’s second-biggest milk processor, has made a provision of $NZ14 million for contingent liabilities in the contamination issue.

Chief executive Theo Spierings has previously said Fonterra does not have any liability if its dispute with Danone ends up in court.

While it is dealing with the fallout from last year’s scandal and the new E. Coli incident, Fonterra is also being buffeted by extreme market forces.

Unparalleled demand for milk powders in Asia and a lack of supply are playing havoc with Fonterra’s earnings.

Last month Fonterra was forced to slash its dividend by more than two-thirds to $NZ10¢ as surging milk powder prices pushed the price gap between its powder products and cheese and casein to record levels.

The milk price Fonterra pays its farmer-suppliers is based on powder prices and is eating into margins on non-powder products. About 70 per cent of Fonterra’s production is milk powders, and the company has estimated the negative impact of the divergent prices at $NZ800 million.

Units in the
Fonterra Shareholders’ Fund
rose 1.3 per cent on Tuesday to $5.29. The units are down 8.6 per cent over the past 12 months.